Buy Term, Invest The Rest. Why? [Chills 21 Sponsored by Providend]
Do you have an insurance plan? Most people would be familiar with buying insurance plans to protect themselves and their loved ones from accidents and illnesses. Recently, there has been growing interest in the idea of buying term insurance and investing the rest of your money. What exactly is term insurance, how is it different from the other types of insurance plans out there and why do Chee Kian and Bryan recommend getting it? Find out more from this episode of a special TFC Chills series brought to you by Providend, Singapore’s first fee-only wealth advisory firm.
The topic of insurance plans is perhaps one of the adulting topics that has mystified many because there’s simply so many types of insurance plans that may be confusing to the average Joe. The first half of this episode aims to provide clear answers to the most commonly-asked questions about insurance. What is the point of insurance? Are insurance plans the same as financial plans? Should we view insurance as a form of investment?
In the second half of the episode, Reggie, Chee Kian and Bryan break down the differences among the most popular insurance plans: whole life, investment-linked and term. Through their discussion, you will have a better understanding of how term insurance can be a part of your financial plan and what you can do to ensure that your money can help you achieve your goals in life.
To get an honest second opinion about your finances from Providend, go to https://thefinancialcoconut.com/work-with-providend/
Reggie: “Buy Term, Invest the Rest” has almost become some form of crusade going around in the personal finance enthusiast community. It’s something pretty heated at times and rightfully I mean, not everybody has to agree, but the proliferation and increased access to financial products today have made this a real possibility, but what really underpins this ideology?
What is the role of insurance and why term? How does Whole Life Insurance and ILPs Investment Linked Plans actually work? When I first started digging into the names alone, it was really messy. So join me as we dive deeper into the broader insurance space and understand better about buy term, invest the rest.
Expand Full Transcript
Welcome to a special mini series of Providend Chills with TFC. In this series, we will be bringing on a team of wealth managers and financial professionals with varied life experiences to share about topics we believe you will be interested in. Definitely this series is sponsored by Providend, if you cannot yet tell, Singapore’s first fee-only wealth advisory firm, meaning all their clients pay them a fixed fee for planning their finances. They do not accept any fees or compensation from product providers at all and with this model, they believe that there will be no conflict of interest.
I’m sure many of you Coconuts have heard of this idea of buy term, invest the rest. But today we are going deeper into what is so powerful about this. High potentially increases your investment yield while giving you increased flexibility in your personal finance mix. So joining me today is a duo which accounts for one of the most senior client adviser and one of the youngest client adviser to be at Providend. One a dad of two teenagers and avid hiker, the other harnessing his greed from his sailing days. Let’s welcome Chee Kian and Bryan!
What is the role of insurance in someone’s personal finance ecosystem?
Chee Kian: You rightly pointed out the plan is your own goal, your financial plan. So insurance is a support role. It’s a just in case scenario. Most of the time I think the human capital, that means your ability to earn an income is important. Let’s say on average you work 40 years. And if your income is let’s say $100,000 a year, 40 years means it’s $4 million. Not that you can save $4 million, but ability maybe over a career is $4 million. You want to really protect that, right? So you don’t want to have any illness or sickness or disability, and then you are not able to then fulfill the potential or not provide for your family and loved one. Insurance is important but it’s an expense that we need to spend just in case things happen.
Reggie: So that is a basis of human capital, essentially your labor income, right? Like you can make all these money by right under normal circumstances. You are going to make this set of money already, unless weird things like COVID happen. But these days, a lot of ways to mitigate all these risks also. So in that sense, insurance is really just a risk management product. It’s not something that you buy to get rich.
Chee Kian: Correct. Nobody buys insurance to claim.
Reggie: But on the ground, I hear a lot of people say, “wah, if let’s say something happened to me I can make a billion dollars” that kind of thing. The seed must be planted somewhere, somehow, somewhat. Some people actually think that buying insurance is a way of getting wealthy in accidents.
Chee Kian: I actually disagree with that. Why do you think insurance company are actually quite successful company, meaning that their profit is quite high? If everybody can claim, I’m quite sure insurance company can’t make money and survive. Insurance is a shared pool of risks, that people claiming are definitely much lesser than the total premium collected. And we really want to have our own financial plan to achieve our goals. We want insurance just in case things happen, right? So our human capital is really important. It’s not just income, but it’s also your own development. You need to pour in resources to make sure that you have the proper training, the network, you’re not irrelevant. You have to manage that side of the risk, but illness, accident, death, insurance can take care and we need to make sure we have the right amount of insurance for our life stage.
Reggie: Okay. So if insurance is not a plan, then what is a plan? What constitutes a financial plan?
Bryan: A financial plan really constitutes a number of elements. Insurance is one of these elements and it’s really the contingency part. But there’s also a main part where you have some goals, for example, you need to save for your children’s education or eventually you want to retire… so you need to save enough for you to retire. Saving is one piece and then growing your savings over time is a big piece that maybe could be the main piece of your plan. There are also other elements such as estate planning, which has to do with the distribution of your assets should you pass on. All these elements come together to form a full financial plan. So I guess when we’re talking about insurance, we just want to emphasize that insurance is really a contingency and not the main plan. If you spend more money on insurance than you do on the rest of your plan, you’re really majoring in something that is minor in the grand scheme of things. When you do that, you may not be able to achieve your goals because you are not funneling enough of your resources into the things that matter more.
Reggie: Okay, give me a little bit of clarity as to what is over insured. What is a situation where someone just buy too much insurance?
Bryan: To have enough insurance, you really need to know what your need is. We normally ask three key questions. What kind of insurance do you need, how much do you need and how long do you need it for? That really is subject to your plan. For example, the length of time that you need depends on how long you need in order to accumulate enough to retire or your target retirement age, for example, or the age at which our children will go to university for example. And then how much you need is really determined by how much the expense will be or how much you will need today in order to cover for those expenses should anything happen to you? That’s the length of time and the amount, and what kind you need is a little bit more simple in the sense that, if you want to cover yourself for death, then you need to buy life insurance. If you want to cover yourself for critical illness situations, you need to buy critical illness insurance, so on and so forth.
Chee Kian: Let me add a bit, I think your question has two parts. One is excessive coverage, one is excessive premium. What you do not want is that… you want to accumulate towards your goal. Then all your resources or rather a large part of resources went into paying the premium. So that is also excessive.
I think Bryan mentioned about the appropriate amount, the coverage, but what we also need to be concerned is are we paying too much. We put too much of our resources into a just in case scenario.
Reggie: Yeah. So risk management tool essentially, right? So fundamentally it has to be linked back to what you said, the goals and what is the plan. Within the plan is more than just the insurance itself. I think that’s kind of where it is. Then how do I know I’m paying too much? I think a lot of people are concerned about this, “Am I paying too much?” Especially when the sector is filled with very sales heavy kind of advice. So I know that’s why we’re here, am I right? I want to hear from you, how do I know it’s 太多，too much for me?
Chee Kian: I think you rightly pointed out a point where insurance is sold, is not bought. Like when you’re free, you wouldn’t think, “oh, I want to buy insurance”. But it’s like a person comes and tell you, “hey you need this insurance.” Then he tells you and paints you this scenario “糟糕 (Chinese “bad”). If I don’t have, something bad will happen to my family and I don’t have enough.” But really I think it has to be a balance between what you need and what you’re paying.
First of all, you need to establish what you need. But if you’re like a fresh graduate, you don’t know what you need… think the rule of thumb is maybe buy 10 times of your annual income. But let’s say if you are married with children and you have a mortgage, then you really know what you need. You need to protect the mortgage, you need to make sure that whatever savings you have not done for your children’s education and your own retirement, you want to protect it. Because just in case something happens, you want the family lifestyle to continue and children’s education to be still set aside, the house to be fully paid, that kind of thing.
So I would say that insurance to protect what you need at the lowest cost possible. That is the most appropriate. I’ll give you an example, let’s say I need $500,000 of insurance. But if I buy a whole life plan versus I buy a term, the difference can be about seven times difference.
Reggie: Wow. Okay.
Chee Kian: So if the premium is seven times different…
Reggie: Covering the same amount right?
Chee Kian: Same amount. Let’s say for example, a 35 years old wants to cover till 65. Think he will retire at 65.
Reggie: I don’t think so, but anyway…. things are changing. Let’s say, let’s say…
Chee Kian: If he buys a whole life plan, he’d be buying seven times more. Let’s say the premium is $1,500 for a term, it can be about close to $10,000 for whole life. If you make $50,000 a year, $10,000 is 20%, that’s a lot. So that’s too much. But actually the coverage is not too much. If you use the right blend for your coverage, then the premium makes sense… $1,500 over a $50,000 annual income, that’s decent, that’s 3%. But of course we need more than just death cover. Like what Bryan mentioned, we are protecting human capital, ability to earn an income, the monthly income. If you have disability or you have a critical illness, you may be down for a while or even extended period of time. So you need to protect.
Insurance is the easiest way for a lump sum payout to cover that, your inability to earn an income maybe for the next two to three years. Because it’s a major illness, you need time to recuperate and catch up with your career.
Reggie: I know you guys are like major proponents of pushing for term essentially. Maybe the only ones out there telling people “Buy term, buy term. It’s good.” So then why do people still consider life insurance out there and what are the difference between term and life essentially?
Chee Kian: I will say that to get a coverage that you want, the easiest is to buy term because of the cost component. Whole life is saying the insurance company is telling you that… I’ll give you the insurance but I’ll help you to also have a saving plan. Say a dollar for a premium, 20 cents or less is actually is the insurance coverage. 80 cents or more actually is the saving component. There is where at age 65, let’s say you buy a whole life and you surrender, you get back a sum of money. Because the extra premium goes into a life fund and life fund actually is an investment. They will likely, if you look at the report, there’ll be some equity and some bonds and then it will grow. But the thing is even if you grow 10% for the life fund, you don’t get the 10%. They will actually have a… when you buy insurance, they will tell you what is the max you can get already. So then they will declare it every year, end of 65 you surrender, so it’s a savings component as well.
Our idea is that you want to separate the two things. You want to have a proper coverage, because if you buy whole life, the premium is so much that you may not be able to get the coverage you need. We really want to plan it separately. First, you have your necessary coverage, then you use the excess that you have to then invest to get a long-term higher rate of return. The best of class out there, no need to restrict to an insurance life fund. The return at the end of say 30 years, you look at the amount, maybe the compounded return is 3% per annum.
Whereas I think if you invest in some kind of an 80% equity, 20% bond combination, you may be able to get 5 – 6%. At the end of 30 years, that’s a lot of money. It can be a few hundred thousand dollars difference between the insurance surrender value versus your investment return if you use a global diversified portfolio with an 80-20 kind of combo.
Reggie: Okay. So essentially what I’m hearing is the whole life plan is a combo product where there’s the insurance coverage and then there’s the whole savings/ investment kind of thing within it. Then why is it so pushed out in the market? Are there any upsides to whole life insurance?
Bryan: There are some situations in which a whole life policy may be appropriate or helpful. As we said, we always want to determine how long you need it, how much you need. For example, if you really wanted to have a certain amount of coverage for the entirety of your life, maybe $100,000 or $150,000 because for some reason when you fall critically ill or you pass away, the capital even at the late stage of their life, the capital can be used for your family. Or the capital can be used when you’re ill to be spent on things like alternative treatments for example, that normally insurance wouldn’t cover.
Reggie: What is an alternative treatment, 针灸 (Chinese “acupuncture)? What is considered alternative treatment?
Chee Kian: TCM (Traditional Chinese Medicine).
Reggie: Really? TCM?
Chee Kian: I think what he meant was, let’s say for example somebody at age 70, he has cancer. So they go through chemotherapy. Hospitalization if he has a hospital plan is all covered right, the treatment. But I think being Chinese, you may still think that, “oh wow. 很伤身 (Chinese “very harmful to the body”) all these chemotherapy.” I may want to go for TCM to say… Yin and Yang, some kind of 吃补 (Hokkien “take tonic”) some form of tonic to make sure that your body can be adjusted and that can be expensive sometimes. Alternative arrangement at home, you may need to have hospital bed, oxygen, or you need to have a full-time helper. All these arrangements while you going through the treatment is not covered by the hospital plan. So if you have a lump sum, $200,000 being paid even at 70, although it’s not income replacement anymore, it’s very useful for all these things. Yeah, that’s what he meant.
Bryan: That’s right. That’s right.
Reggie: That’s cool. That’s cool. So then, okay. Essentially we have two major types of insurance now on the table. The term where covers you a fixed amount of time and it’s only the pure insurance portion, and then the whole life which is the insurance plus savings/ investment kind of thing. That’s where I’m hearing. Then there’s this one other kind of insurance out there that is also a very popular, called ILPs, Investment Linked Plan. These days, I think on the forums, maybe not as popular, people flame it a little bit but can you give me, because it’s a little bit messy for someone from the outside… I want to know what is the difference between whole life and investment linked.
Chee Kian: So all three are insurance. Let’s say you have $500,000 cover for all the three… The first one term, plain vanilla, it’s just a coverage, death, TPD (Total and Permanent Disability). The second one is like the scenario I mentioned, a dollar premium, 20 cents coverage, 80 cents… I help you to save.
Reggie: Like the Cornetto cone, still got the chocolate at the end.
Chee Kian: The third one is insurance company, I also have investment related products but I select for you. So you’ll choose within this. I don’t have you save, you take the full market risk, you select, you choose your Asian equity global equity or technology or whatever, you choose. You cannot blame me if you lose money or you don’t do well. You choose… along the way you like to change, I also allow you to change.
The insurance portion is a bit similar, but then for the growing part, they say you choose yourself. What kind of unit trust within my selection? And if you want to switch, it’s also within. So what we don’t like sometimes is because of the limited selection and also the cost structure.
If you split, you have the whole world. For investment products, you can buy ETF (Exchange Traded Fund), you can buy whatever unit trust out there, and you can choose something that’s very low cost and suits to your needs. But if you are with the ILP, you are restricted. So why restrict yourself? 绑手绑脚 (Chinese “being restricted”) in the sense that you are limited, you are not able to have that flexibility.
So your own investments in term of liquidity, when you need money, when you’re on top, when you’re on the switch, there’s a lot of freedom and it’s easier to plan this way. End of the day, maybe just to also bring back the earlier point in terms of why people are selling whole life. I find that a lot of times they may not be looking at the whole scenario, a holistic plan before they say this whole life is the best plan for you.
May be a bit more I would say…. just looking at the product itself. Some of the features and some of the benefits. So it is not holistic. If I’m in their shoes, I also maybe will look at compensation. The way the insurance companies are structured is they compensate much better for whole life and ILP. If you are influenced by compensation, sometimes that is why it’s being sold that way. Insurance is a lot of time sold than bought.
Bryan: Those are very good points. I just wanted to maybe share a little bit about the difference between investment linked policies and whole life policies because I think that was part of your question as well.
As Chee Kian mentioned, both whole life policies and investment link policies create a situation where they are taking a small portion of your premium, maybe 10 cents…
Reggie: Actually not very small, 80 cents…
Chee Kian: The insurance portion is lesser, it’s the 20 cents.
Reggie: Insurance is only a very small part, right? The 80 cents go to the investment.
Bryan: Yes, that’s right. I meant 10 cents goes to the cost of insuring you and then 90 cents or 80 cents goes to investing. In a whole life policy that 80 cents goes to a life fund which you don’t have a choice of. In a ILP, there is a wider range of funds which you can choose, which I think Chee Kian mentioned. The other thing that is different is that in a whole life policy, the cost of insuring you is usually flat. So what this means is that across the whole life of the policy, the costs that they are deducting to insure you over time is constant. Whereas in a ILP it usually starts a little bit lower, but then it increases as you age. So what happens is that over time, as time passes, more and more of your premium is being used to insure you and less of your premium is actually invested.
Chee Kian: Yeah, this is called the mortality charge. It’s a bit like following your age. You can just imagine that the older we are, the higher probability of dying. So the charge of the insurance gets higher. That is the traditional ILP. Of course now they have a lot of different kinds of plans. There are some plans that ILP is pure investment, almost next to zero protection.
Reggie: Isn’t this called investment?
Chee Kian: But it’s sold by insurance company.
Reggie: So must link somewhere.
Chee Kian: They have to innovate. If you want investment only, I also have planned just for investment, compared to say you buy it through a unit trust platform.
Reggie: Okay, I think that is a little bit concerning in the sense that it adds another texture of measurements because it’s another moving part. In my view, I find it too complicated. Because you add another dimension, essentially add one more formula into your whole life planning.
Chee Kian: Can you imagine now you’re 60 years old, then you feel that I need this insurance still but the cost of insurance gets higher and higher. Just now Bryan mentioned that sometimes we need whole life. If your ILP ties in with your critical illness, I want it to keep till 80 years old or maybe throughout the life, then you’ll keep seeing the thing keep going up. So it actually eats away your savings or your investment, because the way they charge as you age increases and it is a bit like… exponential curve. So it’s not even a linear straight line. That’s the scary part about ILP if its critical illness component is also inside.
Reggie: Okay. I want a little bit of clarity also on this, in a sense that all these kinds of compound products, whether is it whole life or whether is it investment linked? In a scenario where I need cash and I want to stop it, does it mean that everything stops? My insurance, my investments all stop together. Or can I just terminate a part of it, the investment part of it. I don’t know how that works.
Chee Kian: Whole life you can actually take a loan from it. But the interest is relatively high. ILP, I think you can do some kind of surrender. But I trust, I believe that although you can take cash out it is actually not as straightforward as let’s say you have an investment account where you want to top up, you want to stop the regular savings, or if you want to withdraw some amount. The liquidity and how simple it is compared to an insurance plan, I feel that it’s not worth the trouble because you get a better upside in your own investment. You have a lot of flexibility and control compared to you’re tied to a product and the limited selection that they have.
Reggie: And they do charge you a premium on that.
Chee Kian: Yes, true. The expense ratio actually is also higher and that’s why we think that for investment, if you really want to control your costs ILP is not the way to go.
Reggie: So then what is the way to go? If I were to come through your doors, as someone in the thirties, having a stable career, work a few years already? What will you recommend me to do based on like term and everything which is what you propagate, what would that be? Can you give me some color?
Chee Kian: Actually it would not start with how much insurance you need. You start with what is your financial goal? So we need to know the basic things, your income, your expenses, your net worth and what is your goal? Then we have a financial plan in terms of how to systematically accumulate towards that goal. So now we establish all the need to invest. Then we say, okay… basically your ability to reach a goal is maybe based on your ability to save for the next 20 years. You have your income and your expenses. That means you have your surplus, we need to harness this surplus. But what will happen that you are not able to reach your goal. Then we establish the risk, so protect your income... a huge medical bill or what if a disability happens.
So along the way we say, “okay, your goal will be in 20 years’ time.” We need to actually protect your income for the next 20 years and we establish what is the need. Maybe then we work backwards to say, “In terms of critical illnesses, we want to protect three years of your income.” Currently you make $100,000, you minimally need at least $300,000. And in terms of your death and TPD, depending on let’s say you have two kids, you want to make sure that they go to a university that will need $500,000. You want to save towards retirement and pay off your house. Then we say based on what you have and based on what you need, there’s a shortfall of a million dollar of death cover, then let’s go and find something that is most cost effective to cover a million for the next 20 years. And of course, there are some insurance where almost all of us would have. For example, we will have our shield plan, the hospital hospitalization. If you’re old enough, you will have ElderShield or now the CareShield Plan. When you start work, you most probably will have your DPS (Dependent Protection Scheme). So we’ll look at what you have then we’ll see… your healthcare expectation is private hospital, then we upgrade. We will find something that’s suitable for you.
So I would say that the process is to first establish your goals. Then insurance is a support plan, it is a just in case. Based on what you need, a lot of times when a 35 year old comes in through our door, they may have some insurance already. So we will just buy what is the difference that they need? But sometimes they give one trolley load of insurance.
Reggie: They 捧场 (Chinese “To cheer on”) too many people. My friend’s friend, support my friend, don’t do that okay! No support friend!
Chee Kian: So in that case, bo bian (Hokkien “No choice, it cannot be helped) in that sense we have to say, “let’s look at what you have done for yourself.” And maybe sometimes you need to restructure some of the policies. Cause like I say, too much resources went into this…
Reggie: I met too many people, support friends…
Chee Kian: Some people’s example is…… you want to renovate your house, $100,000. It cannot be $50,000 go buy a fire extinguisher, water system and this and that… security system. You really want to make the house look nice. So the idea is make sure that it’s the appropriate amount and the right coverage.
Reggie: What is considered a good goal then? Because everything is linked to the goal. You have a goal, you decide on a plan, then you manage your risks through insurance. So what is considered a good goal? And have you met clients that come into your door and “这个 goal 哪里可能 (Chinese “Is achieving this goal even possible”).”
Bryan: What is a good goal?
Reggie: This is highly perspective.
Bryan: It is quite a subjective thing because everybody’s goal is really determined also by your life decisions. Some people aspire to live a very luxurious lifestyle. Some people can do with a lot less. Some people want to retire early so they can spend time doing other things other than their job. Some people will literally work until they die. So it really depends on what your life priorities are and then determining how much you need in order to support those priorities and by when. And then how reasonable your goal is really also determined by for better or worse, your ability to reach that goal.
Sometimes clients may come in and have a certain goal when after we look at their financial situation, we sometimes have to speak to them and say, “okay, based on what we are seeing in your financial situation, how long you have left based on your career, we think…
Reggie: How long you have left, quite heavy yeah…
Chee Kian: Left to work!
Reggie: How long your income is going to last. And then sometimes we have to tell them, this may not be so achievable or at least not achievable without taking very crazy risks. In those situations, we really have to have a very serious conversation about what is important to them. Because this amount that they’re accumulating supports a lot of different things. It supports a certain level of education for their children, it supports on the type of car they drive, it supports the type of housing they live in, the type of food they eat. You know, there’s always tradeoffs and in order to meet a certain goal, if they are not really able to meet all of them, maybe they can prioritize and determine which ones are more important to them and then adjust the plan such that they can still achieve a very good quality of life.
So how would that conversation look like? Because like everybody wants to achieve all these things, but fundamentally when you look at the resources, you know that unless certain special scenario happens it’s very unlikely that… some people will have these kinds of unlikely situations of achieving the goals.
Chee Kian: Maybe let me explain a bit, the engineer in me will come out. We have a very tok kong (Hokkien “superb”) Excel. So the thing is we can put in all these numbers, we can put in inflation numbers and we can come up with a… let’s say you need to support a 30 years retirement.
For example, I want to retire at age 60. I’m very conservative. I just need $5,000 a month, 3% inflation for the next 30 years after I reach 60. So in Excel, I can just work backwards to say, okay at 60, this is the amount you need. Let’s say you need $2 million. It can be different things. It can be your CPF, your investments and some cash, this and that. So now let’s say you are 20 years away from this goal, based on your income and expense, we know the surplus. We will say, “okay, this is the amount you can save and then already you have some amount of money.
So the Excel can also work to say that base on this surplus that you have and the existing you have, what is the rate of return you need? If the rate of return you need is 5%, we think it is reasonable because with the next 20 years accumulation to get 5% return, no need to do anything crazy. But your surplus is very little and then you say, I still want $5,000. Then we work backwards, “oh, you need 10% per annum.” Then we will be worried because you will be taking excessive risk.
And the thing is in investment, there is a high probability of achieving it if the return is reasonable, because historically that is what the market have provided given a certain portfolio. So we definitely as financial planner, one… our clients’ goals to be achieved with a high certainty, high probability. So doing the numbers help us to have this conversation with our clients, it will be the analytical part. Of course we will speak to the clients to understand a lot of other things, but simple numbers in terms of accumulation needs and the rate of return will help us establish a kind of portfolio that is reasonable to have a high certainty of achieving them.
Reggie: So what is a reasonable rate of returns then? In the market these days, numbers are flying everywhere. I want to know in your view, what is considered a reasonable rate of return?
Chee Kian: We have planning numbers and we have actual numbers. A lot of people out there say historical return cannot guarantee future numbers. But I think we have enough numbers to say that let’s say you have a portfolio of certain percentage of bonds and equity, let’s say 70% – 30% or 60% – 40%, 60% equity, 40% bonds. Because investment is up and down. It also ties to your own personal risk profile. You need to be able to go through this journey and not so volatile until you will get out the market.
We think that let’s say a 5% per annum is quite reasonable for people with 60% – 40% or 70% – 30% kind. It’s not so volatile because the bonds component helps to reduce the volatility. The important thing about investment is not just timing the market is also able to withstand through the up and down and achieve the long-term return that you need.
So really it’s not just trying to maximize return. For us as financial planner, it is to help clients go through this journey, handhold them, make sure that they have the discipline to do constant, regular investing, like RSP (Regular Savings Plan) they call it RSP, in our term called regular savings plan. We will work with them on a regular basis, meet up at least on an annual basis to look at the progress because 20 years, things can also change because they may have better careers or they want to upgrade their house… cash flow change, so we will work with them. I would think maybe to answer, if your plan when you calculate your need of return is say 4% to 7%, I think it is quite reasonable.
Reggie: At the core, is really about probability, right? If your aim is 10%, 20%, not impossible. But probability, what are the chances? And whether the risk is too crazy.
Chee Kian: Yes, because we are talking about… need to be consistently over a 20 years period for examples. I’m quite sure for our investment there’ll be times that you have 10%, 20%, but then there will be also negative year. Just recently, 2018 was a negative year. Then we had a very good 2019 and 2020 actually is a reasonable year, but it’s a roller coaster year. In March come down, then it goes up… So if you are not able to be withstand this roller coaster, you may get out at the wrong time and never get in when you recover. For us, we always tell our clients, you need to understand your risk profile and you need to invest long-term. Staying invested is actually the way to go. And in fact, if the market gives a correction at this, it is giving you a discount. If you have some spare cash, that is outside of your emergency cash, you can put in some more.
Reggie: If let’s say I am someone, I just started my career, I make some money, but my goals are not clear. Because I think all the discussion, all the premise is on clear goals. Your goals must be clear, then we can have a plan and we can manage risk. Essentially that’s the idea. But if my goals are not clear, I come to you, with say, “oh, I already work 5 years, 10 years. I have $120,000 in my bank account and this is my expenses, blah, blah, blah. But I don’t really know what I’m looking for. I don’t really know my goals.” What will you advise me to do?
Chee Kian: I thought maybe there’s some rule of thumb as well. Let’s say for example, you don’t have a clear goal as in like financial goal, let’s say buy a house or save for retirement. I would say think that for… let’s say insurance, you may want to say have some coverage still because definitely you need hospitalization. Maybe you do know how much is your economic worth, just buy 10 times of your annual income and have maybe 2 – 3 years of critical illness cover and you also need to be good steward of your own resource, right? Just now you mentioned about $150,000. You need to maybe put aside six months of expenses so that one cannot be invested, six months emergency cash. The rest, I think you can do something like an asset enhancement. If you cannot really think long-term then go on the middle path, a balanced kind of portfolio, 60% – 40%. If really need to draw down and the market is against you, then maybe draw down on the bond side, for example. At least when you have more clarity, like a different phase in life, you decide to get married or buy a house. You know that there is a certain goal, then you adjust your plan. But putting everything in the bank, I think it is wrong because now it’s like less than 1%. Let’s say you are still talking about only work five years, less than 30 years. Life is ahead of you, really need to make money work harder as well.
Reggie: Okay. so if I don’t have clear goals then go for middle ground, go for something more generic.
Chee Kian: Just to add, I think even as a single person, a lot of times we do have loved ones. Let’s say parents, for example even though we may not be giving them allowance, but if something bad happened, we really think that we want to repay whatever they have invested in us to a certain extent. The ballpark of 10 times, so if that is being paid out and it’s given to the parents, I think it’s just a responsible thing to do also.
Reggie: But I want to caution that part. I feel a lot of young people are a little bit tied down to this whole filial piety thing. These days, I personally feel that in your early days, you need to sort out yourself first. Once you are in a better track, you can sort out yourself, then you can care for your family, your extended family, or your immediate family in the future. I feel like a lot of young people in the early days of figuring out your life, trying different careers switches, don’t take on too much pressure of “oh, I need to repay my parents and all those kinds of things.” I find that very scary for a lot of young people that are in this phase of just searching for their life.
Chee Kian: Actually I’m not taking about that. It’s more like in case worst case scenario happen, accident happen. The person passed on right, so instead of leaving only the savings, insurance… let’s say a term insurance pays 10 times of his income, let’s say $500,000. And that will be just given to the parents. It’s not say filial piety, but it’s more of just leaving behind a legacy to say that I’m not able to do something that I can do later when my income is better. But I’ll just leave behind something for the family. Because the death cover is usually stroke TPD. But in case 你没有死 (Chinese “did not pass on”), that half a million is actually for yourself as well.
Reggie: Very morbid, this discussion.
Chee Kian: TPD is very… a severe kind of accident. Two hands, two legs, two eyes, any pair. Probability is quite low, but it’s quite severe. It’s likely that you are not able to work as per normal already. Your income is severely impact. Or maybe even not even able to make an income already.
Reggie: Heavy. yes, I get your points.
Bryan: Back to your point about taking a middle path. I think that’s okay, but it’s like a stop gap measure in the sense that while you are still figuring things out, then you can continue to have your money grow at a decent rate. But it is still important and I want to encourage everybody to really, especially if you’re young to think about these things very seriously because at the end of the day, your money is really there to help you to achieve what you want in life, to give you things, to be spent on things that matter to you. So until you can become clearer on that it is very hard for you to achieve that. And there’s a danger that you just leave your money invested in a middle path and you end up in a place where you don’t want to end up. So it’s more of a stop gap measure and then you continue to think about where you want to go.
Reggie: Nice, thank you! I think that is a clarity that a lot of people need. You can take tentative strategies like stop gap, middle path, but fundamentally all your whole financial planning and all these goals and things are fundamental to having a clarity as to where you want to go and how you want to achieve your life.
Thank you, thanks both of you. I think we had a great discussion, so fundamentally it links back to goal setting plan and risk management to term insurance. That is what you guys stand for.
Bryan: That’s right.
Chee Kian: Yes.
Reggie: Thank you, have a great day.
Reggie: Hey! I hope you learnt something useful today and truly appreciate that you took time off to better your life with The Financial Coconut. Knowledge is that much more powerful and interesting when shared, debated and discussed. Join our community Telegram group, follow us on our socials, sign up for our weekly newsletter, everything is in the description below. And if you love us, want to help us grow, definitely share the podcast with your friends and on your socials. Also, if you have some interesting facts to share or know someone that you want to hear more from, reach out to us through email@example.com. With that, have a great day ahead, stay tuned next week and always remember personal finance can be chill, clear and sustainable for all.
I have last three questions that we ask every single guest. The first question is what is one core life principle that you hold closely to?
Bryan: Let me answer that by saying that I am a sailor, and I’ve been sailing since I was very young. Kind of the reason that I got into sailing together with my brothers is that my parents thought it was a good idea, a good way to teach us how to be responsible. Because when you’re out there on the open sea, just you and your boat, of course you have squad mates and coaches for safety, but every action that you take is really your own action. Any result that happens from that is attributable to you. If you capsize, if you fall out of your boat, if you’re going fast or you’re going slow is really your responsibility. Off water. when you have to take care of your boat, you have to make sure your equipment is in order, that all relates to responsibility.
So I think through boating, I really learned to take responsibility and not put blame on things and also others. I think that taking personal responsibility is something that I think is very important in life.
Chee Kian: I think your life’s perspective may change if you become a parent. So I’m a father of two kids. Nowadays I think passing down values as legacy is important for me. That means maybe many parents would think that passing down my three assets or they having good grades… that means pressure them in their studies is important. But for me, I think building their bonds and passing them good values to be a good person is important. This is just the phase of my life that I want to work on this.
Reggie: I agree. I give you the prize of Good Dad Award. Next question.
What is a particular personal finance advice that you feel needs to be further propagated?
Bryan: Kind of related to my core life principle. I think taking personal responsibility for your finances and your financial plan and your own money is extremely important. And I think it is something that people may or may not do enough, in the sense that I think a lot of people don’t spend enough time educating themselves and also are quite happy to outsource their financial wellbeing to an advisor, for example. I think while advisers can be helpful, it is also very important for us to take personal responsibility. That’s why at Providend, we actually spend a lot of time and a lot of effort producing things, producing content, video content, sending out emails, writing articles, conducting webinars to try and make sure that our clients are well-educated and that when we work with them, it is a partnership between them and us and not just something that we are doing for them.
Chee Kian: I think for me it’s really back to basics about savings. I think managing your own expenses, understanding what you spend is important. I think a lot of people nowadays, they don’t really keep track. They just have an idea…. okay, I earn this much, I spend this much. But they don’t know exactly where the money is going to. Or if they actually spend within their means because you have credit card and things like that. So that is one thing that I want to teach my daughter last time. Since secondary school I give her monthly pocket money. I remember there are times she come back to me, “daddy, I’m broke. I’m bankrupt.” But that is good lessons because that time is 14, 15 years old, it’s fine. But can you imagine this is 20, 25 or 30, for example, then that’s bad. I’d rather her learn the lessons and know that where the money is going to, and then ability to save is the first and most important lesson.
Reggie: Nice, thank you. Which part of your life are you giving additional focus on now?
Bryan: For me, two broad areas that I’d say I probably am putting a lot of focus on now. For me I’m still pretty new even though it’s been almost two years. I think my role right now is to assist advisors in providing the best advice possible. But at the same time, I’m constantly learning, upgrading and trying to make sure that I’m ready to become a client advisor, which I hope will happen soon. On the personal side I got engaged recently.
I’m spending a lot of time planning for the wedding, but also working out what it means for my financial plan.
Chee Kian: I’m the other side of the spectrum. I’ve done all these, been there, done that. I’m 50, I came into the industry 15 years ago and those clients, I did retirement planning. Partnering them… in Providend we do this progress meeting every year. It’s a very satisfying feeling when you see your clients meeting their goals. So we had a plan 10, 15 years ago, they have a systematic accumulation and now they are meeting their goals. They’re looking forward to the retirement. So the same thing, I’m also at that life stage, I’m 50. I’m looking forward to say at 60 to retire. in 10 years’ time. I’m also accumulating and systematically looking into it, both for my client’s retirement and my retirement is the focus currently.
Reggie: Thank you, thank you. Thanks gentlemen. Appreciate your time.
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